Dollar slips against most rivals ahead of Fed

LisaTwaronite

SAN FRANCISCO (MarketWatch) -- The dollar was lower against the euro Monday but stock market gains and fading risk aversion underpinned it against the yen, as investors positioned for Tuesday's expected Federal Reserve interest rate cut.

Market consensus is that the Fed will cut its benchmark federal funds target rate by a quarter point to 4.25%. See Economic Preview.

The European Central Bank held its own benchmark steady at 4% at its meeting last week. On Monday, ECB executive board member Juergen Stark reportedly said euro-zone inflation could exceed the central bank's projections, suggesting that future rate cuts by the ECB are not forthcoming.

"The gains in the euro are being attributed to the yield advantage for Eurozone benchmark versus the U.S, while position traders are preparing themselves for another cut in U.S. rates tomorrow," wrote analysts at Action Economics.

The Fed is also likely to cut its discount rate to 4.5% from 5.0%, and is expected to leave room for further easing by characterizing risks as tilted toward further economic slowdown. Read The Fed.

Lower rates weigh on the dollar because they reduce the returns on dollar-denominated assets.

The dollar was buying 111.71 yen, compared with 111.70 yen in late U.S. trading Friday, while the euro changed hands at $1.4712, compared with $1.4653 Friday. See real-time currency prices.

The dollar index, which tracks the greenback against a basket of six major currencies, slipped to 76.070 from 76.295 late Friday.

The pound sterling was up about 0.8% at $2.0459.

Last Thursday, the Bank of England cut its key interest rate by a quarter-point to 5.5%, after economic data in the previous few days showed a sharp slowdown in consumer confidence and in services sector growth.

Credit fallout

Despite reasonably strong employment data Friday, the Fed is expected to cut rates further, following up a total of 75 basis points worth of cuts since mid-September. The central bank's easing is aimed at preventing the fallout from the mortgage market meltdown and credit crisis from dragging down the broader economy.

The fallout continues to be felt around the globe. On Monday, Swiss banking giant UBS warned that it will write down the value of its subprime mortgage holdings by a further $10 billion, leading to a loss in the fourth quarter and potentially wiping out all its profits for the year. See full story.

But the bank also said it would get a capital injection of $11.5 billion from the government of Singapore and an unnamed investor in the Middle East, and that news was welcomed by Wall Street. Stocks were higher all day, and ended with solid gains, with the Dow industrials adding more than 100 points. See Market Snapshot.

The stock market also cheered news that MBIA Inc. said that it will get a $1 billion investment from private-equity firm Warburg Pincus as the bond insurer tries to bolster capital to preserve its crucial AAA rating. See full story.

Data Monday from the National Association of Realtors, a real estate trade group, showed a gauge of future home sales increased 0.6% in October, the second straight increase, though the pending home sales index was down 18.4% compared to the same month last year. See Economic Report.

Yen under pressure

Earlier Monday, Japan's Cabinet Office released data showing machinery orders rose 12.7% to 1.08 trillion yen ($9.7 billion) from September. The figure was higher than an average market forecast for a 6.9% rise.

But the better-than-expected data didn't lift the yen, which remains under pressure from Japan's low interest rates. Investors don't expect the Bank of Japan to hike its benchmark anytime soon from the current 0.5% -- the lowest rate in the developed world.

The low rate makes the yen a popular carry trade currency, in which investors borrow lower-yielding funds and invest them overseas in higher-yielding assets.

"The market appears to have largely given up ideas of a BOJ rate hike in the current fiscal year. The yen appears more a function of outside factors, like cross plays, risk appetites, than internal factors," wrote analysts at Brown Brothers Harriman.

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